Fed Looking to Takeover the Repo Market

The Federal Reserve is considering a major change to the structure of obtaining capital by essentially taking over the repo market. The repurchase, or repo, market is essentially a system of short-term lending. Borrowers (banks and investment groups) get capital from lenders (money market funds and other investment groups) for a 24 hour period in exchange for a pledge of collateral.

The Financial Times reports:

The Fed’s deliberations are partly motivated by concerns that the structure of the US overnight repurchase market may have exacerbated the financial turmoil that accompanied the failure of Lehman Brothers in September last year… “The Fed is raising questions about whether the system really protects the interests of all participants,” says one person familiar with the Fed’s thinking.

A major change won’t be discussed until next month, but this would be a huge deal if it went down. The clearing business is a major cash cow for firms like JP Morgan Chase, and taking it away from them would destroy significant value.